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					Change: how to invest a cyclical industry
    Exclusion has been a cyclical industry, cyclical industry complexity and
unpredictable nature also highly challenging, but most of China's A share
of stock is a cyclical industry, it is still very interested in the cyclical industry as one
of issues, hoping to find as close as possible to determine uncertainty in the part.
Buffett does not rule out future investment in oil and encounter such a high certainty
of investment opportunities to participate.
    Cyclical investment companies must first understand their high risk and have
adequate mental preparation. 2006 bull market has been spectacular and far exceeded
the imagination of the great bear market to the crazy speculative and cyclical industry
falling waterfall vividly once again in the interpretation. This so-called blue chip
including Vanke most cyclical businesses, including the biggest decline in more than
80 percent, Jiangxi Copper, etc. about ten more than 90%. Do not think this is the end,
the future prices fell more than 95% of the stock I do not feel surprised. Fell 95%
from 90% is a ceiling, not a very large decline in security.
    Cyclical industry boom of the amount of peak prices go up, the industry downturn
and it is contrary. Cyclical factors affecting industry profitability include product
prices, demand, capital expenditure and capacity utilization dislocation caused by the
additional financial costs. Which is the dominant factor in the first two factors. The
cyclical fluctuations of the two corporate earnings volatility. Part of the cyclical
industry, price and demand volatility great, such as non-ferrous metals, shipping,
prone to extreme profitability. Some prices stable or less volatile, changes in demand
for larger, less volatile earnings, such as banks, securities. Most cyclical business like
in the industry boom of the peak of blind expansion, once the industry is the
formation of a large decline in excess capacity, the excess capacity not only can not
produce benefits, depreciation, amortization, debt, maintenance also generate a lot of
costs, erosion of business profits, so the higher the fixed cost industry, the output
changes caused by the higher volatility of profits. Those in the industry boom of the
appropriate control before the peak expansion of size, industry boom of the late low to
proactively expand the business aggressively is likely to be good investment targets.
  ?
    I put a cyclical industry into consumer cyclical industries and industrial cyclical
sectors.
First, consumer cyclical sector
    Consumer cyclical industries including real estate, banking, securities, insurance,
automotive, aviation, consumer cyclical sectors both a cyclical industry and consumer
industry characteristics. Most of their consumer end users (including corporate
banking), although low brand loyalty, but still has a certain brand. Although demand
fluctuations but the overall upward, and basically just started in China's
industry, a huge market prospects. In addition to automotive, aviation, the assets are
less enterprise, industry, economy low degree of flexibility when a larger scale.
?1, Bank
    Banks are relatively stable prices, demand fluctuations are relatively small,
accounting for a large retail bank which is more cyclical weakening. Profitability of
the banking industry is relatively stable in several industries, but the Chinese banking
industry will face the future and the possible arrival of spreads to narrow the interest
rate market, as well as real estate and financial turmoil has resulted in a large number
of business failures caused by the outbreak of bad debts possibilities.
2, real estate
   Although real estate prices and demand fluctuations, but fluctuations in speed and
magnitude smaller than the industrial sector, and product diversity, the difference of
the Te Xing, certain areas of the products have the resource monopoly characteristics.
Leading enterprises have better ability to resist risks, market downturns can bring
low-cost opportunities for mergers and acquisitions, industry demand for higher
rigidity and certainty.
3, the Securities
   The price of the securities industry with relatively stable, fluctuations in demand is
very high. Comparison of the securities industry, investors are in a special industry,
periodic change more obvious, such as through the valuation and volume indicators
are relatively easy to determine the turning point of the industry.
4, Insurance
   Actually not a cyclical industry, the insurance, but the existence of investment
income, will show strong cyclical phase of China's insurance industry
growth to the main volatile weakening. If it were not encountered major bear market
or bull market, the cyclical insurance industry is not obvious. It should be noted that
in the fully competitive market environment in the insurance industry is vulnerable to
an industry price war, in order to obtain a temporary market share and leadership
position, may appear irrational policy design, policy most of the Du endure for some
years, dozens of , the bad results may appear only after a long time, which is difficult
to assess the risk of investors. Life and peace at this stage is still in the status of
oligopoly competition, with the relaxation of control policies, many foreign insurance
continued into China, foreign insurance market expanding, market competition will
become fierce.
5, car
   ?Rapid model updating of the automotive industry, technology updates faster, are
important assets of enterprises, industry competition, sensitive to oil prices, many
factors affect the profit, profit is difficult to judge. And even if the boom of the peak
of the profitability of different enterprises vary and may not enhance the rate very
high. Might be bad is bad, good may not be a good trade.
6, air
   Airline industry competitive, vicious price competition often (two to three fold
price everywhere), high fixed costs, large capital expenditure, operating costs as oil
prices and exchange rates fluctuated wildly, the aviation industry to the profitability of
the industry characteristics low.
   Real estate, banking, securities, insurance, industry and daily life of the four closely
related, the investors can trade more easily and intuitively feel the cold, and the
factors affecting profitability is relatively simple, relatively more predictable (and
banks and macro- the close of the economy increased the difficulty of judging), the
investment is a cyclical industry a better choice. Characteristics of automotive and
aviation industries decided they are not a good investment targets.
?
Second, industrial class cyclical industry
   Cyclical industries, including non-ferrous metals industry category, steel, chemicals,
cement, electricity, coal, petrochemical, engineering machinery, shipping, equipment
manufacturing. The industry is highly related with macroeconomic, macro-economic
complex, the basic unpredictable (often many famous economists forecast is wrong).
And great price volatility decreased rapidly (such as the recent plunge in just two or
three months 90% of the shipping price, non-ferrous metals are large decrease), the
rapid changes in demand and a long cycle, and sometimes there is no reaction time
investors. Significantly affected by raw material cost of the product, basically
re-assets of enterprise, the input-output cycle is long, the peak of the industry boom of
the large capital expenditure of the large depreciation and amortization, profits are
extremely sensitive to changes in yield, when the industry downturn little flexibility to
adjust the scale, many factors affect the profitability of the unpredictable, it showed a
high degree of earnings volatility, the difficulty of judging cycle turning points and
higher. Other petrochemicals, power, oil and other industries subject to government
price controls there is the possibility of earnings fell unexpectedly.
   Fluctuations in industrial sector has also brought great opportunities for high
returns, but such opportunities are not the average investor can easily grasp. In
particular, some long-cycle industries, such as non-ferrous metal, the rhythm may not
be the wrong step years but 10 years to mitigate this problem. Yet it is colored, oil,
coal, gold, iron and steel resources of the upstream industry of such products a single,
homogeneous and strong, commodity futures market or commodity price index, price
trends and the industry boom of a visually clear guidance (Shipping has a similar
index), according to the product price range is easier to judge the industry turning
point. Prices usually run a certain range, although over time interval will change, but
as long as sufficiently long period of data collection, it can be drawn about the law.
The profits of the upstream industry more volatile, higher risk. , The downstream
industry complex product categories, different historical periods and various
sub-sectors of the different segments, so that more difficult to judge the industry cycle.
Due to the differences, there is no price index as a simple and intuitive judgments
based on macroeconomic and more dependent on the specific circumstances of each
sub-sector.
   ?Cyclical industry, often along the chain cycle of the order to turn a certain place,
usually the recovery began in auto, real estate, infrastructure, machinery, equipment
manufacturing and other downstream industries, and then transfer to the fiber,
non-metallic mineral products, non-ferrous metal smelting rolling, rolling of ferrous
metals smelting and other mid-stream processing and manufacturing, and finally the
upper reaches of the nonferrous metals, petroleum, coal, petrochemical and other
industries. Starting from the downstream industry is a recession, followed by transfer
to the midstream and upstream sectors. Historical background is not a simple
repetition of the cycle, run the law is not static and can not simply apply the historical
experience of the cycle turning points of the judge, but according to the experience of
a concrete analysis of specific situations.
   I put a lower book value (less than 2, less than 1 strong cyclical) and high
price-earnings ratio as a necessary condition for buying cyclical businesses, because
that is the actual valuation of lower corporate and industry in the doldrums time. For
the industry price index, price indices can be combined book value and profits, largely
determine the operational phase of the corresponding industry. But even if the index is
running at low levels, is not you can buy right away, still need a longer observation
time, because the indicators may be more significant to break the historical range.

 ?Here are some investment principles and techniques cyclical industry:
1, cyclical industry valuation is almost impossible task, trying to determine the
valuation of the cyclical safety margin is often futile enterprise.
2, standing on a long-term perspective, often the price-earnings ratio but the higher
the lower the actual valuation, instead of the high price-earnings ratio may
underestimate the value of the region.
3, according to industry boom of the sale of time judge is more reliable than the
valuation basis, the industry boom of the peak is the most dangerous time, after the
2012 peak is definitely not a good buying opportunity.
4, a more useful reference for periodic valuation is the book value rather than
price-earnings ratio.
5, can not buy shares fall as the basis for a cyclical decline in the industry are often far
exceeds the imagination.
6, cyclical industry needs high investment security and certainty, especially strong
cyclical industry. Profitability of a significant slowdown or even negative growth is
not a good selling points, the majority of business loss or failure will be safer. Now
most of the cyclical industry not for the latter scenario.
7, no wealth of industry knowledge and deep understanding of the industry before, do
not touch.
8, do not overestimate their ability to ring, do not assume some indicators as to buy
based on own.
9, cyclical company's share price is often recurrent, or decline to engulf
most of the gain, phase hold is the best strategy, not super-long-term holding.
10, very different characteristics of different industries, can not apply the experience
of other industries as the basis to judge.
11, need to select the industry leading enterprises, SMEs are likely to rebound in the
industry again before the fall, even if there is no viable competitive advantage.
12, the future of certain industries might international industrial shift. Shipping, steel
history experienced several international transfer, forward other industries may also
happen, which is devastating the industry factors.
13, need strategic investment in a cyclical industry perspective, the perspective from
the industry cycle options trading opportunity, and not care about short-term
investment opportunities.
14, or look after other people are often very simple, but really predict accurately is
extremely difficult.
?
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posted:8/31/2010
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